(Corrects patent number in 11th paragraph in story
published July 28.)

July 28 (Bloomberg) -- Some Chinese producers of rare-earth
magnets are seeking to use this month’s expiry of a key patent
held by Hitachi Metals Ltd. to expand exports of the micro
magnets used in products from motors to smartphones.

The expiry of a 17-year-old patent that defines the
structure of such magnets paves the way for previously blocked
Chinese producers to sell to U.S. customers, said Sun Baoyu,
chairman of Shenyang General Magnetic Co. It’s formed an
alliance with six Chinese producers to promote their products
and fight Hitachi over other patents, that the Japanese company
says largely prevent rivals from making magnets.

“Hitachi’s whole patent package’s base is this ingredient
patent,” said Li Weifeng, a Shanghai-based analyst with
Everbright Securities Co. It is a “very basic” patent for the
magnets, he said.

The end of the patent will pit the seven producers in the
alliance and potentially others who try to tap into the market
against Hitachi and eight Chinese companies that have paid for
the right to make and ship the magnet. An increase in exporters
of the magnets could cut prices of the product used in Apple
Inc.’s iPhones and Toyota Motor Corp. hybrid-electric cars.

Hitachi holds more than 600 patents for rare-earth magnets
globally, some of which it acquired after taking over Sumitomo
Special Metals Co. in the 2000s, said spokesman Akio Minami.

‘Almost Impossible’

“The company considers it’s almost impossible for other
companies to commercially manufacture the magnets if avoiding
all of our patent network,” said Minami, “Since we don’t know
details of action by the seven Chinese companies, we refrain
from making comments on this matter.”

Hitachi Metals dropped as much as 1 percent to 1,638 yen
today in Tokyo and traded at 1,648 yen at the midday break. The
benchmark Nikkei 225 Index was up 0.5 percent.

Magnet makers in China are struggling with overcapacity
after an earlier price boom spurred a flood of investments. The
nation produces about 100,000 metric tons of sintered rare-earth
magnets annually, compared with almost 300,000 tons of capacity,
according to Everbright’s Li.

Japanese companies hold most of the world’s rare-earth
magnet patents, while China produces about 90 percent of global
supply, Li said. Chinese exports of the magnets were 18,800 tons
last year.

“Hitachi and those who have entered the market would worry
about a flood of Chinese competitors,” said Le Yukun, head of
metals and mining with BOC International Holdings Ltd., Bank of
China Ltd.’s investment banking unit. “Prices will fall if the
Chinese alliance wins.”

U.S. Patent

The expired U.S. patent 5,645,651 covers magnets with
neodymium, a rare earth element, and cobalt, according to Sun.
The Chinese alliance plans to sue Hitachi in the U.S. over
several other patents that cover production, he said.

“Japan and U.S. are the most important overseas markets
for magnets,” Shenyang General’s Sun said, adding that clients
are concerned about Hitachi’s patents.

Beijing Zhongke Sanhuan High-Tech Co. and Ningbo Yunsheng
Group Co., China’s two largest producers of rare-earth magnets,
are among the eight Chinese companies that have paid to use
Hitachi’s patents. Zhongke Sanhuan is licensed to use more than
400 Hitachi patents related to sintered rare-earth magnets and
methods for their manufacture globally, according to a company
statement on its website.

Everbright’s Li expects more trade disputes as Chinese
producers seek to boost magnet exports, though he doesn’t expect
they would win legal disputes against Hitachi on the remaining
patents. BOC’s Le agrees Chinese producers aren’t likely to win
any disputes over remaining patents.

Neodymium oxide has tumbled 80 percent to 295,000 yuan
($47,463) a ton from its record 1.48 million yuan in 2009,
according to Shanghai Steelhome Information prices.